Financial Spread Betting

Spread betting offers a simple and effective method of backing your own judgement and betting on movements in financial markets. It is a tax-efficient* method of trading, and allows you to profit from a falling market just as easily as a rising one.

Spread betting is a highly geared investment, in which you don’t have to cough up anything like the full price of the shares. If spread traders use leverage to magnify their exposure and then end up on the right side of a shift in market direction, these sudden moves can net them large gains in a short period of time. But not only that! Spread betting also allows you access to thousands of different financial instruments, from UK stocks and world indices to commodities and forex pairs. Spread bets have proved to be a very useful product not just for traders or speculators but also investors like me.

Trading spread betting not only offers tax advantages and low barriers to entry but its points-based methodology also makes it easier to understand and trade a multitude of markets. These include:

Shares e.g. Vodafone

Indices e.g. FTSE 100, Dow Jones

Foreign exchange, e.g. EUR/USD

Commodities, e.g. coffee, cocoa, oil

Interest rates

Bullion

The high degree of gearing or leverage is a particular feature of this type of transaction. This stems from the margining system applicable to such bets which generally involves a comparatively modest deposit or margin in terms of the overall contract value, so that a relatively small movement in the underlying market can have a disproportionately dramatic effect on your bet. If the underlying market movement is in your favour, you may achieve a good profit, but an equally small adverse market movement cannot only quickly result in the loss of your entire deposit, but may also exposure you to a large additional loss unless you enter into a limited liability contract with the firm.

Of course there is certainly room for more growth in the UK spread betting market and we are confident that with increased exposure and education the retail demand for these products will grow.

In the UK, spread betting provides the investor with a tax efficient opportunity to speculate on fluctuations in the prices of thousands of global market instruments including commodity markets, world equities, FX and indices on one platform. Such markets include:

Shares e.g. Vodafone

Indices e.g. FTSE 100, Dow Jones

Foreign exchange, e.g. EUR/USD

Commodities, e.g. coffee, cocoa, oil

Interest rates

Bullion

Investors continue to be attracted by the advantages of financial spread betting compared to other more traditional investing methods, including the fact that gains are presently free from CGT or stamp duty, the ability to gain access to leveraged returns and the opportunity to profit from both up and down markets.

Basically, you actually place a bet on the outcome of a financial ‘situation’ – so, rather than buying sterling/selling dollars to back your belief that the pound sterling will increase in value over a given period against the Greenback, you bet that this will happen.

The effect is that any profits that are derived are taxed as a bet, not as a financial transaction. In most jurisdictions, this is very advantageous – as long as you are making profits! Any losses, however, are just money thrown away and cannot be offset in any way as you may be able to with a capital loss, for instance.

I do not know if you have ever contemplated financial spread betting as a medium of your investing – but you may be interested to learn that any gains are free of capital gains tax under present tax law when placed via a spread bet.

Spread betting offers some advantages over more traditional investment methods

Tax free profits: Spread Betting is free of capital gains and income tax for UK residents

Profit either way: You can profit from both rising and falling markets, helping you stay profitable regardless of the state of the economy.

Engaging in spread betting can carry a high risk. This is principally due to the power of margin, e.g. leveraging your trade to gain a larger exposure to the market than you would if playing the market by traditional means. As these transactions differ markedly from normal bets you should not engage in this form of betting unless you understand the nature of the transaction you are entering into and the true extent of your exposure to the risk of loss. The amount that you may win or lose will vary according to the extent of the fluctuations in the price of the index on which the bet is based instead of a sum predeterminable when a normal bet is placed.

If you do this consistently, most tax offices will then regard this as an income stream and you will be taxed accordingly (seek financial advice).

Of course there is still plenty of risk involved with financial spread betting simply because it is premised on gearing, which can accentuate your gains just as easily as accentuate your losses.

Remember positions do not need to be large, and a less leveraged position (i.e. a small amount of $ per ‘point’ moved by the underlying instrument on which you are betting) means you can have exposure to a situation on which you hold a view without losing too much. Most spread betting houses offer guaranteed stop losses (for a small consideration!), which means you can always guarantee the maximum amount you are willing to bet even in a volatile market.

Workings of Spread Betting

Spreadbets allow traders to go long or short on a particular asset such as a stock, index or commodity. This in essence means that you can profit if the market falls (if you are short) and you can profit if the market rises (if you are long) – of course provided that your view is proved correct.

With financial spread betting you take a trade, either buying, referred to as going long, if you believe the price is going to rise, or sell, commonly known as going short, if you believe it will fall. You then have to decide how much you want to bet for each point the price moves, where a point is the equivalent of a penny for stocks or a point on an index.

The amount you bet will affect your exposure and the size of the margin you need. For instance, if you bought Marks and Spencer (MKS) at £10 a point at an offer price of 331p, this would give you the same exposure as buying 1,000 stocks. But although you have the same exposure as buying £3,310 of shares, if the margin deposit requirement is 10%, you would only need to put down £331 in capital to cover your exposure.

You can close a position whenever you like – having said that most trades last for anything from two minutes to three weeks. The spread betting provider makes his money through the spread. There are also financing costs to consider i.e. overnight financing costs – this is because you are trading on margin meaning that you are effectively borrowing money from your broker.

Let’s take an example -:

Tom thinks that Marks & Spencer stock are going to rise in value. His spread betting provider is quoting 331p/330p so he buys at £20 per point. This allows him the equivalent exposure to 2,000 shares, equivalent to £6,620 of market exposure. Because the margin is 10%, Tom deposits £662 to open the trade.

If the price rises

Three days later the Marks & Spencer price has risen to 335p to buy and 334p to sell, so Tom sells at 334p. The price has gone up three points so at £20 a point he makes a profit of £60. He also receives back his margin of £662 minus any interest that has been incurred for financing the deal.

Are my Profits really Tax-Free?

Yes. Under current UK law, profits from financial spread betting are free of capital gains tax and stamp duty. Please note that tax laws are subject to change and depend on individual circumstances. Please note that while Spread Betting is free of Capital Gains Tax (CGT), the investor is also unable to offset any losses against capital gains for CGT purposes.

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Is Spread Betting for me?

Spread betting is right for investors who have a great deal of knowledge and understanding of equities and have solid self discipline. The practice is a very risky one, so you will need to determine your risk tolerance before you start to place bets. It is always important to remember not to place bets that you cannot afford to lose, so the risk you take is dependent on your experience and knowledge. If you are just starting out it is best to start with a small amount of money. If you think that you have the right amount of knowledge and risk tolerance, then spread betting is right for you.

Spread betting is a service that is predominately available through an online application or platform, all of which are heavily regulated by the FSA in the UK or the financial authorities where you live. All spread betting providers will allow you to open a demo account for you to play around with first, allowing you to gain the experience before betting with your own money.

The best way to get to grips with spread betting is to open a practice account and then experiment without risking any real money.

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Take a quick look further down this page for web addresses of spread betting dealers, who provide full information on how a spread bet works…

If you wish to learn more about spreadbets, check out the following website, which offers full, detailed information [including examples] of spread trading. You will also find their buy & sell ‘quotes’ [similar to the 10798-10802 example above] online…